Exploring the self-regulatory way of Zero-Knowledge Proof to achieve Web3 ecosystem from the standpoint of the 'Lemon Problem'

Compiled by: Loxia

Lemon Issues and Trust Crisis

Today I don't plan to talk too much about technology, what I want to discuss is a social issue we are facing in the field of encryption. The title of this speech is 'Social Consensus and Self-Regulation.' First of all, I would like to ask everyone, have you heard of the 'Lemon Problem'? Does this term ring a bell?

Well, not too impressive, not too much.

So, in American slang, 'lemon' refers to an unreliable car, and it's a car that you don't know beforehand whether it will be unreliable. I'm not sure about the origin of this word, but 'lemon' is what it means.

Well, a good car, a reliable car is called "peach". I didn't know this before, I found out by checking, quite cute.

The "lemon problem" is basically a problem for used car dealers. You go to the used car market and it looks a bit like this, and it feels a bit deceitful because you don't know if the car you're buying will be a "peach" or a "lemon". This is also a big problem in the crypto space today - everything may seem like a "peach", but in reality many protocols are "lemons".

So, when you buy a car or use a protocol, there is a certain probability that it is a 'peach', and there is also a certain probability that it is a 'lemon'. So how much are you willing to pay for this? What is the weighted average price you are willing to pay for something that may become a 'peach' or 'lemon'?

What price are you willing to pay for this? It's like some kind of weighted average, and we can all internalize this concept—there's a certain 'lemon' probability multiplied by the value of 'lemon', plus the 'peach' probability multiplied by the value of 'peach'.

You might have a gut feeling that the price you're willing to pay is somewhere between what you're willing to pay if you know it's a "peach" and what you're willing to pay if you know it's a "lemon." So why is this a strange dynamic and why are we talking about fruits?

So, what incentives does this provide for used car dealers? What is your incentive if you know that everyone will pay a price between 'peach' and 'lemon'?

! Starting from the "lemon problem", explore the self-regulatory way of zero-knowledge proof to realize the Web3 ecosystem

Your incentive should only be to sell 'lemons', right? If people are willing to pay a higher price than 'lemons', you have no reason to sell 'peaches', you can directly sell 'lemons' to them.

This is often referred to as a scam.

Well, I want to pause for a moment, this is a big problem that the crypto space is facing today – the lemon problem.

Starting from the 'lemon problem,' exploring the self-regulatory way of zero-knowledge proof to achieve Web3 ecology(https://img.gateio.im/social/moments-00acd4116d60c22a5b0163256e6e661d)

Well, what's happening in the crypto space today is that because of this lemon issue, the probability of "peaches" has actually gone down, and fewer and fewer people are willing to grow "peaches" because "peaches" are expensive, and "lemon" dealers are flooding the market because they think wow, I can sell "lemons" directly to people who are willing to pay more for my product than it's actually worth because they are misled into thinking it's "peaches". Overall, the willingness of users to participate in the ecosystem has decreased, which is reasonable.

Now in my mind I can hear some of you, or the imagined interlocutor, saying: 'This is the cost of permissionlessness, we must take the good with the bad, just like the 30% discount in the crypto field, you know this is reality.'

But this is not a one-time cost, the lemon problem is not a one-time cost, it is actually a death spiral.

Because when our trust is lower, it is more difficult for "peaches" to outperform "lemons", and "peaches" are withdrawn from the market, and we are left with "lemons", which is not a good place.

So we need to somehow help consumers identify "lemons", and I would say that if we don't, Gary will — in fact he's already worked hard — so that's why I'm pushing for some form of self-regulation if we want to keep the spirit of what we're growing in the crypto space and solve the lemon problem.

Let's compare this with something done well, which may be controversial.

Casino Mode: Building a secure and fair trust mechanism

Okay, what am I saying?

So am I saying that the field of encryption is just a casino?

No, I'm saying that the crypto space is not even as good as casinos,

We need to do at least as well as the casino. If cryptocurrencies can do,

We need to at least do what the casino does well,

I think it's worth a look, and that's what I'm going to talk about next.

! Starting from the "lemon problem", explore the self-regulation method of zero-knowledge proof to realize the Web3 ecosystem

Casinos are known for their fairness and security, and they promote this vigorously. Why do they do this? They spare no effort to prove that the casino is not manipulated, except, of course, in the way that it obviously is.

Let me give you a few examples, this is an automatic card counter.

Well, why did they do that? Why did they switch to this instead of having the dealer deal manually?

They want to prove to you that you have not been deceived, except of course in the way you have been structurally deceived, but they want to prove to you that this is verifiable randomness.

They ban cheaters and share cheater information with other casinos. Why are they willing to join forces against cheaters? If I'm Flamingo Casino (a casino in Las Vegas) and I find a cheater, why should I share this information with the winner?

They have these dice calipers to ensure the weight of the dice is even. All of this is to convince consumers that they are not being deceived, that they are playing fairly, even though the odds are against them, they will not be deceived or cheated.

Governments and casinos actually co-invest in making casinos secure. We forget that casinos are very legal and fast-growing. Did you know that Ethereum is expected to achieve $2 billion in transaction fees this year, while the global casino industry will achieve $300 billion in revenue.

Marketing security is one way casinos have worked very successfully with the government to convince them to make this thing safe for everyone.

Okay, how does this work? This is a virtuous cycle, higher trust equals more users equals investment and fairness with security.

! Starting from the "lemon problem", explore the self-regulatory way of zero-knowledge proof to realize the Web3 ecosystem

So we need to do that in a decentralized way. We know the fact that three letters that I didn't hear in any conversation this week – FTX, nobody talks about it, we like to pretend it's just a nightmare, you know, the bad guys really erode trust in the entire ecosystem, not just the people they're targeting, but everyone.

Zero-knowledge proof-driven self-regulation and social consensus

But we have the technology to prove security and legality, we just need to adopt it at the societal level, so the necessary wave this week - zero knowledge, right? This is a word we all know.

We have the ability to prove integrity, to prove identity, reputation, and computational integrity.

! Starting from the "lemon problem", explore the self-regulatory way of zero-knowledge proof to realize the Web3 ecosystem

The problem lies not in the technology, as we continue to participate in these meetings and constantly discuss technology. In fact, some of the issues lie in social consensus and ideology.

We know that we have the ability to create new forms of social consensus around protecting applications and users, we need to accept that this is what we must do, we need to self-regulate, and then we can be regulated by others.

So I think we are very extreme in ideology, either completely unlicensed or fully licensed, black or white, either this or that.

But in fact, there is a very wide spectrum of social consensus between them.

Let me give you an example, what ZK and ASIC will ultimately research can unlock - this is simply the curse of ideology, you know that only a third-party identification token holder who can prove the legitimacy of funds can enter a pool. This can be both permissionless and permissioned. I can establish a pool with these rules, and you can choose whether to enter, so we have this concept of libertarian paternalism.

Someone, somewhere, like the social consensus in this room, will decide that this is the way we operate safely, and then the users decide what they want to do, not that we are completely black and white, and if there is any permission, even if it is social, even if it is democratic, we can't allow it.

Another example is the concept of decentralized clean providers that Vitalik and our co-founder Zach Williamson have been studying. It is a social graph where individuals prove the legitimacy of your funds and transactions, observe behaviors, and say that this is not something we want to be associated with. This is very different from centralization, very different from censorship, and is a democratic form of social consensus, where all of us say that we will not tolerate certain behaviors in our ecosystem.

The goal here is still to allow users to express their preferences in various protocol designs, not to restrict freedom, but to give users more choices than what I am saying now.

So ZK implements this permissionless approach at the base layer, and at the same time provides a permissioned social consensus at the application layer.

These are many more examples, and you know there's a lot of talk about proof of reserves, anti-phishing, opt-in compliant pools, proof of legitimate funds.

But all this is to say that we need to turn zachXBT into ZK, and we need to use mathematics and social consensus, not trust or centralized compliance.

So in summary, we need ZK to unlock the three major improvements.

First of all, we need to preserve user choice while allowing for self-regulation and compliance. As a community and ecosystem, we have not really discussed self-regulation, we just hope and pray that others won't notice.

We will not achieve our goals if we allow this situation to occur. Web3 will not succeed. We need to prove to someone that we take care of and care for our users, so we need to prove to the users that as a community, we support them.

Let's not try to impose ideology on users, let's give them the choice of where they want to go, that's ultimately what this space is about, it's about freedom, it's about autonomy.

Finally, we need to improve security, we need to make it reliable, and we need to make encryption a necessity rather than an option. We forgot that the government was at least supposedly made up of voters, why were Uber and Airbnb once illegal, and now they are legal again? Because somebody walked up the steps of Congress and said, "You can't take my Uber unless I'm dead," somebody did, somebody did, individuals did, and I don't know if you remember it.

One of the ways we make crypto a necessity and integrated into the fabric of our economic life is to make sure that it is reliable and secure, and that we support our users.

This is how we turn 'lemons' into 'peaches'.

! Exploring the self-regulatory way of implementing zero-knowledge proof in the Web3 ecosystem from the perspective of the 'Lemon Problem'

This issue brings a video from BlueYard Capital published on Youtube, titled "Jon Wu (Aztec) @ If Web3 is to Work... A BlueYard Conversation".

Original video link: